Profits of the largest listed insurers on the Nigerian Stock Exchange (NSE) have surged even amid the wrought caused by the coronavirus pandemic (Covid-19), thanks to yields on investable funds that compensated for unfavourable underwriting conditions.
For the first six months through June 2020, companies’ combined net income spiked by 84.06 percent to N15.58 billion from N8.46 billion the previous year, the highest in four years.
Analysis by BusinessDay shows a lot of firms would have had the bottomline beaten down if they had not invested in short-term government securities when yields were attractive.
The investment income realised by insurers in the last four years stood at N59.49 billion, according to data compiled by BusinessDay.
A breakdown of the figures shows investment income increased by 18.85 percent to N19.16 billion as at June 2020 from N16.07 billion the previous year.
Analysts have warned that deterioration in yields on government instruments and the Covid-19 crisis could undermine future profitability as investment return could be pressured.
Nigerian Treasury Bills (NTB) yield crashed abruptly following the central bank’s directive in October 2019 to all banks to exclude individuals and local corporates from investing in Open Market Operations (OMO).
With rising combined ratios on the back of spiralling claims and operating expenses, shareholders will be at the receiving end as their returns could dwindle.
AXA Mansard’s net income surged by 154.24 percent to N3.60 billion as at June 2020, as it realised N2.57 billion in investment income.
AIICO Insurance recorded an underwriting loss of N10.58 billion on the back of change in annuity and life fund, but investment income and foreign exchange gains of N19.07 billion led to net income of N2.75 billion.
Cornerstone Insurance plc net income spiked by 99.41 percent to N1 billion as at June 2020, while investment income increased by 447.17 percent to N810.55 billion in the same period.
Mutual Benefit Assurance’s net income was up 9.69 percent as at June 2020, while it realised N1.13 billion in the period under review.
Regency Assurance’s net income was up 783.49 percent to N550.46 billion in the period under review as it realised N260.15 million in investment income.
The Covid-19 pandemic and the attendant lockdown imposed by the government to contain the spread of the virus disrupted business activities across Nigeria, and the insurance industry was not spared the pang of the unexpected headwinds.
“Lower demand and investment returns, a significant deterioration in the credit quality of fixed income securities and increased mortality rates from the virus could pressure earnings in the life segment,” said analysts at Afrinvest Securities Limited.
Analysts at Afrinvest Securities added that rise in Covid-19 related claims and premium rebates and lower interest rates could affect non-life.
According to the second gross domestic report by the National Bureau of Statistics (NBS), the insurance sector contracted by 28.15 percent in the second quarter of the year.
The industry contributes less than 1 percent to the economy as operators still struggle with lack of trust, especially with regards to claim settlement, socio-cultural and religious beliefs of Nigerians, weak enforcement of compulsory insurance policies, slow pace of innovation among industry participants and high poverty rate.
Analysts at PriceWatercoopers (PWC) have said there is a possibility of regulator asking for an extraordinary solvency test to ensure insurers can withstand the immediate knock-on impact of the pandemic.
“There will be pressure on sales on reduced business activities,” said analysts at PWC.
“There will also be a surge in health, travel and business interruption, and supply chain,” said the analysts.
The regulator had hiked the minimum capital requirement for insurers so that they are liquid enough to undertake big ticket transactions necessary to bolster earnings.